February saw a sharp reversal and subsequent bounce in global risk assets. Developed and emerging market equities moved lower, the USD strengthened, US interest rates rose across the curve, the oil complex moved lower, and credit spreads widened. The Bank of England kept rates unchanged, but indicated that tighter monetary policy may be in store given stronger economic growth. US CPI rose 2.1% from a year earlier, stoking fears of rising inflation and tighter US monetary policy. Minutes from the January Federal Reserve meeting indicated no change to the future path of rate increases, yet in his first Congressional testimony as Fed Chairman, Jerome Powell took a slightly more hawkish tone and suggested the possibility of four rate increases in 2018. The US job report showed that 200,000 non-farm jobs were added in January (the 88th consecutive month of job creation), the unemployment rate remained at 4.1%, the labor force participation rate remained at 62.7%, and average hourly earnings rose 2.9% from a year earlier.
Notable corporate transactions announced in February included the $2.5 billion acquisition of Modern Times by TDC, the $1 billion purchase of Avigilon by Motorola, the $1.4 billion sale of NRG’s integrated US renewable energy platform to Global Infrastructure Partners, the $500 million acquisition of the LA Times by Patrick Soon-Shiong, General Dynamics’ $6.8 billion purchase of CSRA, the $755 million purchase of Jarilowsky Fraser by Scotiabank, the $1.4 billion acquisition of Infinity Property and Casualty by Kemper, Charles River’s $800 million purchase of MPI Research, the $2.3 billion purchase of A. Schulman by LyondellBasell, the $24 billion merger of Albertsons and Rite Aid, the $1.2 billion purchase of CJ Healthcare by Korea Kolmar, Merck’s $394 million purchase of Viralytics, the $8 billion purchase of Blue Buffalo by General Mills, Roche’s $1.9 billion acquisition of Flatiron Health, the $400 million purchase of Poloniex by Circle, the $10 billion merger of Spectrum Brands and HRG, and the $1 billion purchase of Ring by Amazon.
Developed market equities were mostly lower in February (see page 8), with the largest losses in Spain (-6%), Germany (-5.2%), and Italy (-3.9%); Australia moved higher (+0.3%). US small caps underperformed large caps, with the Russell 2000 down 3.9% and the Russell 1000 down 3.7% (see page 3). Energy (-10.8%), Consumer Staples (-7.8%), and Telecom (-7.1%) were the worst performing sectors in February; IT moved slightly higher (+0.1%) (see page 2). Large cap growth (-2.6%) outperformed large cap value (-4.8%) in February (see page 3). Emerging market equities were mostly lower in February (see page 9), with the gains in Thailand (+2.5%), Russia (+1%), and Brazil (+0.5%); China (-6.4%), Mexico (-5.7%), and Argentina (-5.1%) were the worst performing.
In currencies, the USD Index was up +1.7% in February (see page 10). The Japanese Yen was up +2.3% against the USD, while the worst performing were the Swedish Krona (-4.9%), Canadian Dollar (-4%), and Australian Dollar (-3.6%). Emerging market currencies were mostly weaker against the USD, with the biggest losses in the Indonesian Rupiah (-2.9%), Indian Rupee (-2.5%), and Brazilian Real (-1.7%).
US interest rates moved higher across the curve in February (see page 12). 10 year rates closed the month at 2.86%, up from 2.71% at January month end. Investment grade and high yield spreads widened in February (see page 13).
In commodities, the GSCI index was down 3.3% in February (see page 11), with gains in Agriculture (+4.7%) and losses in Energy (-5.6%), Industrial Metals (-2.9%), Precious Metals (-2.1%), and Livestock (-1.7%). Within individual commodities, Cocoa (+9.6%), Wheat (+6.8%), and Cotton (+6%) saw the biggest gains, while Natural Gas (-11.2%), Gasoline (-7.9%), and Heating Oil (-7.6%) saw the biggest losses. Gold was down 1.8% for the month.
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